EJ: he difference between forex futures and spot trades
efore you consider on becoming a forex trader you should first and foremost understand the various forex market techniques available and also their comparisons is very important. It is very important to understand several marketing strategies as well as analysis and also to include various marketing strategies so as to adopt the best forex trading strategy and system for your investment. In this article we will look at the differences between futures and sport markets.
Forex futures basically means that it is an agreement wherein both parties agree to buy and/or sell a particular currency which is not in US dollar at a specified price on a specified date in the future, as according to a standard contract that is agreed by all the participants involved in such a currency exchange.
In such an agreement, it is vital to know that none of the parties are really selling or buying any one thing. What is being agreed on is that both parties definitely agree to sell or buy currencies on terms that have already been agreed on and at a specified date in the future, which means when the contract reaches maturity.
In a futures contract, the currency terms are made in standard form and of which could be traded and are all subject to specific rules in trading of a particular exchange with regards to limits in the daily price. A future contract is also adjusted everyday such as for the maintenance, initial margins and cash settlements.
Now let’s take a look at what spot forex trade is actually. Spot forex trades are very short term trades on the forex markets. The term 'spot' is believed to come from the term 'on the spot' or an abbreviation to spot which representing the time period for 'settlement' of a currency exchange transaction, and usually no more than two working days.
Therefore, forex spot trading, therefore in its simplest form is the short term, short settlement delivery of traded currencies. Spot traders take advantage of price variations in currencies and do not generally take positions in the market longer than on a same day basis. Most spot conditions are settled within minutes of a trade. However, spot trading in its truest sense should not be confused with scalping.
What is the difference between Forex Futures Account and Spot Forex Accounts? If you look at marketing materials, most will tell you that spotforex market is a better choice than a future market. However, these two are almost similar. Let's spot their difference from one another to distinguish which one has more advantages.
To begin, we will point out the features of both markets in specific areas such as advantages on 24 Hour Market, Spread, Commissions, Flexibility, Roll-Over Interest versus Carrying Charges and Transparency.
24 Hour Market - Both markets, futures and spot are not open 24/7. The actual trading time for futures and spot markets are 23 to 24 hours daily and this is only on a 5 day work week. Friday and Sunday afternoons are non-trading days in North America.
Spread - Spreads in future forex and spot markets differ. For future market, it is not fixed and largely depended on the market's current liquidity. With this factor, the spread for market will probably amount to one pip or even smaller and there exists a limit which is likely to lessen the spread down to zero. A variable spread such as this is also present in spot market which may also expand depending on market conditions. However, it features a fixed or constant spread which is wider than that of the variable spread. In general, the spread in future market is smaller than spot market as it offers more liquidity.
Commissions - Future market offers an average commission cost of per side of $3.15 for dealers. Thus, the rate for entry and exit would be $6.50 per contract. On the other hand, in spot market, dealers do not add on commissions. Dealers are compensated on their spread. All in all, the one with the most advantage is commissions is spot forex market.
Flexibility - When it comes to flexibility, Spot Forex offers the greater advantage. This is due to flexibility on lot sizes. For instance on a 100,000 lot which is often too huge for new traders, dealers divide the lot smaller like into a 10,000 lot. This makes it easier for new traders to handle. On the other hand, currency futures cover two lot sizes. One is a "full-size contract" which is usually larger than 100,000 and the other is a "mini-contract" which is barely exists on some pairs. Mini-contracts usually are half the amount of full-size contracts. It is essential to note that the smaller the lot size, the easier it is to manage.
Roll-Over Interest versus Carrying Charges - Moving on to Roll-Over Interest and Carrying Charges, the currency futures forex market offers a competitive advantage. It is obvious that a dealer earns by lowering down or increasing interest payments. Note also the the premium on roll-over generated from the futures market contract is usually higher than that of the spot market contract. The cost interest premium from this is combined with the cost of the futures market contract, thereby making it less noticeable.
To fully understand this process, let's look at this example. For instance, a trader holds a futures contract in GBP/USD that is due to expire within 45 days. The current value of the contract is 1.9811 with a spot price of 1.9866. Notice the difference. The variance is due to the interest premium which will grow out of today and the expiration date. When the contract expires, currency futures market and spot market price will significantly be of the same value with one another.
Transparency - Currency Futures Market has greater transparency than Spot Market. In currency futures, the order flow, open interest, outstanding orders and volume can be seen right off. Spot forex market dealers do not disclose this information. On the other hand, one reason for this or for incomplete information from dealers is the complexity of the market.
